First Midwest Finally Cleans House

NEW YORK ( TheStreet) -- First Midwest Bancorp (FMBI) has moved aggressively to trim it stubbornly high level of problem loans and move on.

As expected by FIG Partners analyst John Rodis, who said in August that there was a "pretty good chance of a bulk loan sale between now and year-end," First Midwest of Itasca, Ill., in the third quarter reduced its nonperforming loans by 46% by targeting "$223 million of select non-performing and performing potential problem loans for accelerated resolution, resulting in charge-offs of $99 million."

First Midwest had $8.2 billion in total assets as of Sept. 30. The Chicago-area lender last Wednesday reported a third-quarter net loss applicable to common shares of $47.8 million, or 65 cents a share, compared to second-quarter earnings of $6.3 million, or nine cents a share, both in the second quarter and during the third quarter of 2011.

During the most recent quarter, the company transferred $171.1 million in nonperforming or potential problem loans to held-for-sale, and modified its disposition strategy for $52.4 million in nonperforming or potential problem loans, while charging-off 44.4% of the total.

This left the company with $112.2 million in nonperforming loans as of Sept. 30, declining from $206.7 million the previous quarter. First Midwest had $155.0 million in total assets as of Sept. 30, or 1.88% of total assets, improving from 2.99% the previous quarter, and 2.53% a year earlier.

First Midwest on Oct. 26 agreed "to sell $64.0 million of loans held-for-sale, which represents 71% of the total loans held-for-sale at September 30, 2012." The loan sale is expected to close during the fourth quarter, with the loans being sold close to their carrying value.

The company's total third-quarter provision for loan losses -- the addition to loan loss reserves -- totaled $111.8 million. Following the third-quarter credit actions, First Midwest was left with loan loss reserves totaling $105.0 million, covering 2.01% of total loans, and 105% of nonaccrual loans -- excluding balances covered by Federal Deposit Insurance Corp. loss-sharing agreements -- making it appear that reserve provisioning over the next few quarters could remain somewhat elevated.

First Midwest Bancorp's capital ratios declined as a result of the credit actions, but remained strong relative to regulatory requirements. The regulatory ratio of total capital to risk-weighted assets declined to 11.65% as of Sept. 30 from 13.68% the previous quarter, but was well above the 10% required for most banks to be considered well-capitalized. The company's ratio of tangible common equity to tangible assets was 8.26% as of Sept. 30, declining from 8.83% the previous quarter.

First Midwest CEO Michael Scudder said during the company's earnings conference call that "the remaining pool of non-performing and potential performing problem assets are better situated to improve or, as necessary, be liquidated," which "positions us for significantly lower future credit costs and we expect the resulting capital pressure to be relatively short-lived when these benefits are added to our current business momentum."

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